Which TSP L Fund is the Best?

December 16, 2020 8:04 AM
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The L funds are a very popular choice especially now that they are the default investment for new employees. 

Consequently, a question that I get all the time is, “Which L fund is the best?” 

While there is certainly not a “Best” option, there are dramatic pros and cons between the different L funds.

Here is a list of the current L funds:

  • L Income
  • L 2025
  • L 2030
  • L 2035
  • L 2040
  • L 2045
  • L 2050
  • L 2055
  • L 2060
  • L 2065

L Fund Basics

The first thing to understand when investing in the L funds is what they are designed to do. 

In essence, the L funds are not unique funds but are simply a mixture of the 5 core funds (C, S, I, F, and G).

The TSP created the L funds in an effort to simplify investment decisions for federal employees. Many feds who were unfamiliar with the 5 core funds struggled to know which mix they should use. 

The idea is that federal employees can simply put their entire TSP balance into the L fund that is closest to their projected retirement date and then leave it for a long time and as time goes on, the L funds automatically invest themselves more conservatively as people approach retirement. 

As the target date for each fund is passed, it becomes the L Income fund. This just happened to the L 2020 fund. 

Example

For example, if John Smith was planning to retire in 2035, he’d invest his entire TSP in the L 2035 fund and let it ride. Over the next 15 years, the L 2035 fund would slowly become more conservative (more G and F fund) until it became the L Income fund. 

So Which is The Best?

If someone is looking for the L fund that has the potential to earn the most over time, it will always be the one with the furthest target date. Right now, that would be the L 2065 fund. But this will also be the L fund that has the most volatility. 

As of October 2020, the L 2065 was split up like this: 

  • G Fund: 0.35%
  • F Fund: 0.65%
  • C Fund: 48.77%
  • S Fund: 15.58%
  • I Fund: 34.65%

As you can see, this fund has very little G and F in it. It is meant for those federal employees that have a long-time time horizon. 

The L Income fund is on the other side of the spectrum and is very conservative. Here is the allocation for the L Income fund as of October 2020: 

  • G Fund: 71.92%
  • F Fund: 5.83%
  • C Fund: 11.60%
  • S Fund: 2.86%
  • I Fund: 7.79%

Since most of the L Income fund is in the G fund, this fund is very unlikely to lose money. That being said, this fund is also very unlikely to earn much over time. 

Retirees especially will want to find a balance between being too conservative or too risky so that they don’t outlive their money but they also can make it through the next market downturn. 

Conclusion

The L funds can be a great tool for many federal employees. The most important thing is that you understand what the L funds are going to do over time and to make sure that it makes sense for you now and in the future.

© 2021 Dallen Haws. All rights reserved. This article may not be reproduced without express written consent from Dallen Haws.

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About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at PlanYourFederalBenefits.com.

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